Calpine to incur $5.5 billion in 2005 non-cash asset impairment charges

By Caroline Salls

Pittsburgh, April 17 - Calpine Corp.'s management and audit committee concluded that material charges for impairment of some of the company's assets for the year ended Dec. 31 were required resulting from factors that arose during the fourth quarter of 2005, according to an 8-K filing with the Securities and Exchange Commission.

As a result, Delta will incur $5.5 billion in 2005 non-cash asset impairment charges.

The contributing factors included:

• Restrictions arising from the company's Dec. 20 bankruptcy filings, including the need to obtain support or approvals from the bankruptcy court, creditors' committees and debtor-in-possession lenders to execute key business decisions;

• The company's current status as a Chapter 11 debtor, its current credit constraints and its focus on reorganizing and emerging from Chapter 11 have made it less likely to commit to expending additional capital in the foreseeable future for some development and construction projects;

• Near-term action to sell or abandon operating plants that currently have significant negative cash flow is more likely as part of the restructuring process;

• Debt covenant restrictions and recent court rulings restrict or prevent the use of proceeds from the sale of assets, or use of cash from operations, for development and construction projects;

• The company's bankruptcy filing and related credit constraints make it much more difficult to secure long-term power purchase agreements with electrical utilities or other customers that would have made it possible to finance the construction of projects or allow merchant power plants with current negative cash flow to become profitable; and

• Historically high and very volatile natural gas prices in recent times have made many customers hesitant to commit to long-term base load PPAs for gas-fired electrical generation.

The general classes of assets affected and associated charges include equipment, development project and other impairments with $2.1 billion in impairment charges; $8 million in expected future cash expenditures related primarily to costs to ready equipment for sale. $2.4 billion to account for the impairment or disposal of long-lived assets; $6 million in expected future cash expenditures related primarily to sales costs.

Also, $1.6 billion in additional valuation allowances is expected in connection with deferred tax assets due to the inability to assume future profits and due to the company's reduced ability to implement tax planning strategies to use its net operating loss carryforwards while in bankruptcy.

The company said it also expects that a portion of the losses incurred in 2006 will not generate tax benefits and, therefore, additional valuation allowances may be required.

Calpine said it also expects to incur a $900,000 charge in connection with the deconsolidation of some of its Canadian and other foreign entities and $100,000 in deferred financing costs.

According to a company news release, the non-cash charges will not impact Calpine's liquidity position.

"Calpine can no longer conduct business as usual," chief executive officer Robert P. May said in the release. "We're taking the tough but necessary actions to rebuild our company while focusing on the core power assets and markets where we can best compete.

"Near-term, our goal is to achieve positive cash flow in 2007. And we're taking the right steps to get there - optimizing our power portfolio, reducing operating and interest costs and streamlining our organization."

Calpine, a San Jose, Calif., power company, filed for bankruptcy on Dec. 20 in the U.S. Bankruptcy Court for the Southern District of New York. Its Chapter 11 case number is 05-60200.

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